Jump in Medical Costs Pushes Core Inflation Higher

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February 21, 2007 (Prices Byte)

Jump in Medical Costs Pushes Core Inflation Higher

For Immediate Release: February 21, 2007

Contact: Lynn Erskine, 202-293-5380 x 115

Prices Byte by Dean Baker

An extraordinary 0.8 percent jump in medical care costs led to a higher than expected 0.3 percent core inflation rate in January. The overall inflation rate for January was 0.2 percent, as a 1.5 percent fall in energy prices more than offset a 0.7 percent increase in food prices in January. The annual inflation rate in the core over the last three months has been 2.0 percent, down from a 2.7 percent rate over the last year. The overall inflation rate has been 2.7 percent over the last three months, up from 2.1 percent over the last year.

The jump in medical care costs reported for January will not be repeated, but it suggests that the moderation in medical care inflation reported in prior months’ price data was an anomaly. With the January jump, the annualized rate of inflation over the last three months is 5.0 percent, compared to a 4.3 percent rate over the last year. The rate of inflation in medical care going forward will probably be close to 4.0 percent.

There were a number of other anomalous numbers in this report, which were largely offsetting. On the high side, tobacco costs jumped 3.1 percent in January and hotel prices rose by 1.1 percent, bringing the annual inflation rate in these components over the last quarter to 18.3 percent and 8.4 percent, respectively. Both series are very erratic (tobacco costs probably reflect new taxes put in place in January), and are likely to show much lower inflation in future months.

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